Chapter 9 – Financial Planning and Analysis: The Master Budget
Solution:
9-75
114. Parson Corporation, a wholesaler, provided the following information:
Month
Merchandise
Purchases
Sales
January
$142,000
$172,000
February
148,000
166,000
March
136,000
165,000
April
154,000
178,000
May
160,000
166,000
Customers pay 60% of their balances in the month of sale, 30% in the month following sale,
and 10% in the second month following sale. The company pays all invoices in the month
following purchase and takes advantage of a 3% discount on all amounts due. Cash payments
for operating expenses in May will be $119,500; Parson’s cash balance on May 1 was
$127,800.
Required:
Determine the following:
A. Expected cash collections during May.
B. Expected cash disbursements during May.
C. Expected cash balance on May 31.
A. Month
March
April
May
Total
B. April purchases to be paid in May
Less: 3% cash discount
Net amount
Add: Cash payments for expenses
Total expected cash disbursements
C. Balance, May 1
Add: Expected collections
Subtotal
Less: Expected payments
Expected balance, May 31
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115. Fortner Manufacturing has a cash balance of $8,000 on August 1 of the current year. The
company’s controller forecast the following cash receipts and cash disbursements for the
upcoming two months of activity:
Cash Receipts
Cash Payments
August
$45,000
$57,000
September
66,000
56,000
Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary,
additional financing can be obtained in $1,000 multiples at a 12% interest rate. All
borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs
at the end of the month. Interest is paid at the time of repaying loan principal and is computed
on the portion of debt repaid.
Required:
A. Determine the ending cash balance in August both before and after any necessary
financing or debt retirement.
B. Repeat part “A” for September.
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116. DuPree Enterprises reported the following cash collections in July and August from
credit sales:
July
August
From June receivables
$33,000
From July sales
105,000
$45,000
From August sales
168,000
The company sells a single product for $20, and all sales are collected over a two-month
period.
Required:
A. Determine the number of units that were sold in July.
B. Determine the percent of credit sales collected in the month of sale and the percent of sales
collected in the month following sale.
C. How many units were sold in August?
D. Determine the accounts receivable balance as of August 31.
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117. Lancaster Company provides services in the retail flooring industry. The following
information is available for 20×5:
* Twenty percent of the firm’s services are for cash and the remaining 80% are on
account. Of the credit services, 40% are collected in the month that the service is
provided, with the remaining 60% collected in the following month.
* Services provided in January are expected to total $250,000 and grow at the rate of
5% per month thereafter.
* January’s cash collections are expected to be $240,400, and month-end receivables
are forecast at $120,000.
* Monthly cash operating costs and depreciation during the first quarter of the year are
approximated at $250,000 and $15,000, respectively.
* Lancaster’s December 31, 20×4 balance sheet revealed accounts payable balances of
$28,000. This amount is related to the company’s operating costs and is expected to
grow to $36,000 by the end of 20×5’s first quarter. All operating costs are paid within
30 days of incurrence.
* Company policy requires that a $20,000 minimum cash balance be maintained, and
Lancaster’s 20×4 year-end balance sheet showed that the firm was in compliance with
policy by having cash of $23,000.
Required:
A. Determine the sales revenue earned that will appear on the income statement for the
quarter ended March 31, 20×5.
B. Compute the company’s first-quarter cash collections.
C. Compute the cash balance that would appear on the March 31, 20×5 balance sheet.
D. What are some possible actions the company could pursue if, at any time during the
quarter, it finds that the cash balance has fallen below the stated minimum?
118. The following information relates to Mega Corporation:
* All sales are on account and are budgeted as follows: February, $350,000; March, $360,000;
and April, $400,000. Mega collects 70% of its sales in the month of sale and 30% in the
following month.
* Cost of goods sold averages 60% of sales. Purchases total 65% of the following month’s
sales and are paid in the month following acquisition.
* Cash operating expenses total $60,000 per month and are paid when incurred. Monthly
depreciation amounts to $18,000.
* Selected amounts taken from the January 31 balance sheet were: accounts receivable,
$115,000; plant and equipment (net), $107,000; and retained earnings, $85,000.
Required:
(NOTE: Ignore income taxes in answering these questions).
A. Prepare a budgeted income statement that summarizes activity for the two months ended
March 31, 20×1.
B. Compute the amounts that would appear on the March 31 balance sheet for accounts
receivable, plant and equipment (net), and retained earnings.
Solution:
119. Discuss the importance of budgeting and identify five purposes of budgeting systems.
Solution:
120. List several factors that an organization might consider when developing a sales
forecast.
121. Barry Clarion, new-accounts manager at East Bank of New Hampshire, has been asked
to project how many new accounts he will open during 20×2. The local economy has been
growing, and the bank has experienced a 10% increase in the number of new accounts over
each of the past five years. In 20×1, the bank had 10,000 accounts.
Clarion is paid a salary, plus a bonus of $20 for every new account above the budgeted
amount. Thus, if the annual budget calls for 1,000 new accounts, and 1,080 new accounts are
obtained, his bonus will be $1,600 (80 $20).
Clarion believes that the local economy will continue to grow at the same rate in 20×2 as it
has in recent years. He decided to submit a projection of 700 new accounts for 20×2.
Required:
Your consulting firm has been hired by the bank president to make recommendations for
improving the bank’s operation. Write a memorandum to the president defining and
explaining the negative consequences of budgetary slack. Also discuss the bank’s bonus
system for the new-accounts manager and how the bonus program tends to encourage
budgetary slack.
Solution:
122. Randall Corporation, headquartered in Pittsburgh, has a manufacturing plant in Dallas.
Plant managers desire to participate in the company’s budget efforts, which, for the past 10
years, have been handled solely by top executives in Pittsburgh. Dallas managers feel that by
becoming involved, they can make great strides in terms of improving operating performance
of their aging facility.
Required:
Briefly discuss this situation, focusing on the benefits and problems of letting Dallas
managers participate in the company’s budgetary efforts.
Solution: